Volume and price are the 2 purest forms of data in technical analysis. All other indicators are based mostly on price and some on volumes. Unlike the share market, where each share traded is considered to be 1 volume, the volume in forex is calculated differently. This is because forex doesn’t have a centralized exchange, thus the calculation is different.
In forex, the volume is calculated by the amount of movement in the price. The movements are known as ticks. Thus the ticks movement represents a number in volume. Volume in forex measures the “worth” of the market move. Movement that backed by high volume are more significant. There is a saying that says “volume precedes price”, where volume is consider leading indicator.
Healthy Trend & Unhealthy Trend
A healthy trend is a trend backed up by increasing volume data. In an uptrend, an increasing in volume while the trend is moving up is considered a healthy trend. In a downtrend, an increasing in volume while trend is moving down is healthy trend.
A trend with decreasing volume is indication that the trend is weakening. Example in and uptrend, when the volume starts decreasing, the top is near, and the trend might starts to move sideway or reversal soon.
Accumulation
Accumulation is where the bulls take control of the game. In a down trend, accumulation happens when the price start moving sideway (or start moving up slightly), with the pick up on volume. After that reversal is possibly going to happens soon.
Distribution
Distribution is terms to describe the bears take control of the game. In an up trend, distribution is where the trend starts moving sideway (or slightly moving down) with increasing volume. After that reversal is most probably going to happens.
Volume spike and reversal
Area with more volume can be observed as significant support/resistance area. When many volume spikes appear in an area, it is possible that reversal is going to happens. A single spike on the other hand might be caused of news announcement.
Volume and breakout
Volume data can be used to confirm a breakout. Breakout is where the chart starts to move after some chart pattern formation. A breakout with low volume might be fake breakout. A breakout with large volume is more significant, and price is likely to move to targeted profit level.
Volume Based Indicator
Volume based indicator are less common than price based indicators. Here are some more popular volume based indicators.
- Volume bar on the chart on MT4
- Volume
- Money Flow Index
- Market Facilitation Index
- On Balance Volume
- Accumulation / Distribution
